Crafting an Exit Strategy

ÒYou often see clients who are more ready for their data center burning down than for their outsourcer going out of business.Ó — Brad Peterson, Mayer, Brown, Rowe & Maw LLP

Just as your firm has a disaster recovery plan that you review yearly, so should you have an exit plan for any outsourcing deal you make. That\’s the advice from Brad Peterson, a partner with Chicago-based Mayer, Brown, Rowe & Maw LLP, the 10th largest law firm in the world and a global leader in outsourcing law.

ÒPeople generally spend far more time getting into these things than on [planning] how they\’d get out,Ó Mr. Peterson says. That leaves companies trapped when a relationship goes bad, the supplier disappears, or a series of breeches forces you to terminate the contract. Now what?

ÒOutsourcing a business process is in many ways like getting a functional lobotomy,Ó Mr. Peterson wrote in a paper on outsourcing. ÒYour company will no longer know very much about the function that you\’ve outsourced.Ó That transfers a lot of power to the provider, and can leave you helpless and trapped if things go south.

Instead, Mr. Peterson suggests planning ahead, specifically about these issues: First, if the current relationship were to end, think about where you\’d go. Would you find another external provider, or move things back in-house? In either case, what would you need that only your current provider has? It might be hardware, software, people, or unique knowledge. Maybe it\’s written down; maybe not. In any case, you want to make sure your contract with the provider specifies that you have the right to all of that information, Mr. Peterson says.

Second, maintain the relationship on good terms. That means that even if you end up ending the contract, the supplier will be more likely to be motivated to treat you professionally — just as you\’ve treated them. You also want a contract that specifically helps you negotiate a smooth transition. If you don\’t do that, you risk making the supplier a perpetual partner.

Also, Mr. Peterson suggests maintaining enough internal knowledge that you can exit the relationship should you decide to. One way to do that, he says, is with an exit plan that you check yearly to make sure that you\’re retaining some internal knowledge.

For example, he\’s has been working with a client who was moving to a new service provider. Once his client decided to leave the current provider — for financial reasons, poor performance, and lack of promised technical skills — his client began to quietly work with other vendors to identify another provider without spooking the current one.

Next, with Mr. Peterson\’s help, they began to build a case for leaving that contract without paying heavy termination fees. ÒThey analyzed the [contractual] breeches to be able to prove they should be able to get out for default,Ó he explains.

Next was what Mr. Peterson calls Òa detailed and very difficult analysis of how to exit from the relationship.Ó Concurrently, they began negotiating a new outsourcing relationship with a new provider. Finally, they made the transition.

In your planning phase, realize that this sort of change takes time. In this example, the span from deciding to switch to the actual transition was about six months, Mr. Peterson says, Òand [we] were moving very quickly.Ó

What the client might have done better, Mr. Peterson says, is to spot the issues more quickly and realize there were problems. ÒOne thing that people often don\’t realize about outsourcing deals,Ó he says, is that Òthe longer you go, the deeper in it you get. In outsourcing relationships, problems tend to fester and grow rather than diminish if you don\’t pay enough attention to them.Ó

His standing advice: ÒManage close to the contract, of course. Be hard on the substantive issues while soft on the people to preserve the relationship, while also maintaining the contractual relationship.Ó But his focus in talking to clients is often this: ÒDon\’t spend so much time hoping the situation gets better. Things rarely get better without real action.Ó

Summary:

It\’s critical to plan how you\’ll get out of an outsourcing contract should the need arise. Make sure your rights are explicitly spelled out in the contract by imagining what might happen if the relationship ends. What would you need to walk away? Meanwhile, maintain the relationship by addressing problems when they arise.